Social Innovation Act Would Use Private Funds to Solve Public Healthcare Problems

Goal of pilot project is to help reduce number of visits to the ER made by poor people in cities like Camden

State Sen. Teresa Ruiz (D-Essex)

New Jersey is poised to become the first state to use a mechanism called “social financing” to funnel money directly from investors and foundations to nonprofit organizations running healthcare programs for public agencies.

If Gov. Chris Christie signs the New Jersey Social Innovation Act, approved Monday by both chambers of the Legislature, the state’s Economic Development Agency (EDA) will guarantee $15 million worth of loans in a pilot program that directs private donations to nonprofits working to reduce the number visits indigent patients make to emergency rooms.

Participating groups would use the money to set up health education and prevention programs for public health agencies that are intended to keep clients from overburdening public health resources. According to the bill, investors should be able to reap some of the savings.

“There are a lot of great nonprofits out there, but a lot of these nonprofits don’t have the means to get the grants,” said Assembly sponsor Angel Fuentes (D-Camden), who cited the case of an uninsured Camden man who cost Cooper University Hospital $1.2 million in emergency care over the course of 18 months of treatment.

The state reimburses hospitals for some “charity-care” expenditures, which amounted to $455 million in outpatient visits to instate hospitals that accept Medicaid in 2012. In Camden, one percent of patients are responsible for 30 percent of hospitalization costs, according to the Camden Coalition of Healthcare Providers.

“Far too often we are seeing individuals forego preventive care and turn to emergency rooms first for their healthcare needs,” said Senate cosponsor Teresa Ruiz (D-Essex) in a statement. “This is an opportunity to improve the healthcare delivery system in our communities through a program that encourages organizations to implement new and innovative strategies that will focus on preventive care and early intervention.”

Under the bill, the EDA will guarantee loan agreements between lenders and eligible nonprofits and agencies. The repayment terms will be negotiated on a case-by-case basis, with funds coming from any savings realized by the state from the reduction in agency expenditures and subsidy payments to hospitals. If the savings are greater than anticipated, sponsors say, investors may receive more.

One concern is the possibility that the state could lose money by guaranteeing the loans, which would occur if the expected savings don't materialize. If that were to happen, the loan guarantee fund would take a loss, according to an analysis by the nonpartisan Office of Legislative Services.

Other unpredictable financial questions depend on how much the program will collect in grants and how each loan gets structured. What is clear, however, is that the EDA stands to lose $15 million if the departments don’t save any money and the loans can’t be repaid as intended.

But Fuentes said he expects that the state will not take a financial hit. In addition to believing that the program will lead to savings, Fuentes also expects that philanthropic foundations would provide much of the funds to guarantee the loans. Under this scenario, the risk of financial losses would be split between the state and the philanthropies.

The sponsors inserted some amendments into the bill to address financial concerns and make it easer to recruit financial backers. The pilot program sunsets after five years. What's more, the legislation calls for the establishment of a study commission to be overseen by the EDA. If Christie signs the bill, the commission will issue annual reports help solicit private donations.

Fuentes said he would not support the state guaranteeing the loans if the commission and EDA aren’t successful in recruiting funders.

It's up to the EDA to determine the makeup of the commission, but the bill stipulates that two members will come from the health department and the department of human services.

The director of the state department’s Office of Faith Based Initiatives will also sit on the commission -- a designation that Fuentes says he made because the current director, a Christie appointee, supports the legislation. Fuentes hopes this inclusion helps convince the Republican governor to sign his bill, which passed overwhelmingly in both houses.

“I have lots of confidence it will succeed,” he said. Referring to the ability to use private funds to solve public problems, he added, “If you really think about the whole concept, this is something Republicans love.”

The act has already garnered support from Camden Coalition of Healthcare Providers founder, Dr. Jeffrey Brenner, who just won a MacArthur genius grant for his work on attacking the issue of too-frequent E.R. visits. Fuentes also claims to enjoy support from potential investors like George Overholser, former director of strategy and new business development at Capital One and founder of Third Sector Capital Partners; Tracy Paladjian, cofounder and CEO of Social Finance; and Frances P. Sykes of the Pascale Sykes Foundation.

If signed, the act could serve as a model for other states that are considering this novel approach to financing public programs in a cash-strapped era. Fuentes says elected officials in Pennsylvania have called to ask about it, and it follows on the heels of fledgling programs in New York and Massachusetts that gather private investments to support initiatives to tackle homelessness and prison recidivism.

“We want to provide healthcare to every individual, but we need to do it in a smart way,” Fuentes said. “We need to think outside the box and that’s why this social innovation loan program is so important.”